April 2010

Fine Gael’s claim today that that Irish financial institutions may be exposed to up to €7 billion should Greece default raises an interesting question: which countries have the largest exposure to Greek debt? According to the Bank of International Settlements, exposure to Greek debt is very much a European affair. The Peterson Institute for International Economics report (based on data from the Bank of International Settlements) that French banks —with €60 billion—have the largest exposure to Greek debt, on an ultimate risk basis (mostly through ownership of Greek domestic banks, such as Crédit Agricole’s controlling share of Emporiki Bank), while German banks with a €34 billion exposure are the other principal eurozone creditor. The potential losses facing the US are significantly less (€13 billion).

Of the other much-maligned “PIIGS”, Portugal and Ireland could also suffer hefty losses in the event of a Greek default: Portuguese banks have €7.5 billion in exposure to Greece, while Irish banks could be sweating over the fate of €6.5 billion. Of course, given the astronomical sums of money we have already poured into our banking system, €6.5 billion almost sounds “manageable”.

Declan Curran

Private Banking Sector exposure to Greece by country, 2009 Q4

*Luxembourg and Switzerland figures are combined in Table 1 as the $60+ billion exposure of Luxembourg to Greek debt relates to the 2009 Q4 shift of residence of the European Financial Group (EFG) SA, ultimate owner of EFG Eurobank from Switzerland to Luxembourg. Source: ECB, Bank of International Settlements (BIS), estimates calculated by Jacob Funk Kirkegaard for the Peterson Institute for International Economics.

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According to NCB Stockbrokers, as reported in the Examiner today, if house prices have continued to drop at the same rate as in 2009 then over 50 percent of all mortgage holders will be in negative equity by June of this year (this assumes that house prices are on average down 45% since the peak). The same story reports that the ESRI predict that 53% of mortgage holders will be in negative equity if house prices fall by 50%, and that the Bank of Ireland report that 21.5% (40,000) of its residential mortgages are in negative equity, and that the average level of negative equity is presently greater than €50,000. There’s clearly a significant difference between 21.5% (BoI) and 50% (NCB), and it’s likely that the true number in negative equity is somewhere between the two.

It is also the case that there are significant geographical variations in rates of negative equity for two reasons. First, rates will vary in line with household growth, with some areas experiencing a large growth in new homes, and hence new mortgages, in the Celtic Tiger years. For example, there was significant household growth in the commuting counties around Dublin – Meath (69%), Fingal (68%) and Kildare (57%) between 1996-2006, whereas growth in other counties was substantially less, such as Sligo and Monaghan (both 22%). In the high growth counties, a large number of new mortgages would have been in the 2003-2008 period (with house prices in Dec 2009 having fallen to April 2003 prices according to the PTSB/ESRI index). Second, rates will vary in line with local housing markets. Daft.ie, for example, report that asking prices have dropped between between 43% (Dublin city centre) and 21% (Limerick) between the peak of the market and Dec 2009, with more people in negative equity in those areas with the highest price drops. It seems likely then that negative equity is likely to affect more people, with the size of the equity gap also larger, in the commuting belt around Dublin than in other places across the country. What that means is that the consequences of negative equity, in terms of ability to move homes and consumer confidence, also varies geographically and may have additional effects on local trade.

“In fact, I’d say the real war was a war over swibbles. I mean it was the last war. It was the war between people who wanted swibbles and those who didn’t… Needless to say, we won” (Philip K. Dick, ‘Service Call’ 1955).

In Philip K. Dick’s short story ‘Service Call’ the world is (about to become) policed by biological telepathic organisms encased in mechanical housing. These entities called ‘swibbles’ were developed and sold as a way of stopping conflict ensuing from ideological differences. When a swibble comes across an individual that holds an ideological perspective different from the mainstream they are literally ingested by the machine.

'Service Call' by Philip K Dick available in Volume 4 of the Collected Stories (Gollancz)

Therefore people install swibbles in their homes to monitor their thought process and ensure they do not stray from the established ideology, a way of demonstrating their adherence to the hegemony. As the swibble repairman in the story proudly proclaims:

“There won’t be any more conflicts, because we don’t have any more contrary ideologies. It doesn’t really matter what ideology we have; it isn’t important whether it’s Communism or Free Enterprise or Socialism or Fascism or Slavery. What’s important is that every one of us agrees completely; that we’re all absolutely loyal. And as long as we have our swibbles… You know the sense of security and satisfaction in being certain that your ideology is exactly congruent with that of everyone else in the world. There’s no possibility, no chance whatsoever that you’ll go astray – and some passing swibble will feed on you”

Dick’s story offers a science fiction metaphor for what Foucault terms the practice of ‘Governmentality’. Governmentality accounts for the range of practices and discourses that are encompassed within the apparatus of the state. Part of this process involves the construction and prescription of ‘truth’ which are produced through tactics of governing, and reproduce systems of power. Foucault argues that the emergence of modern government has resulted “…on the one hand, in the formation of a whole series of specific governmental apparatuses, and, on the other, in the development of a whole complex of knowledges [savoirs]”. (more…)

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The Sunday Independent reported yesterday that deals struck with developers at the height of the housing boom could bankrupt county councils. The example they give is of Dun Laoghaire-Rathdown who signed up for 63 ‘affordable’ units and 80 ‘social’ units on the old Dun Laoghaire Golf Club site for a cost of €35.6m. The Council already has €27.5m of affordable and social units purchased at the height of the boom. Assuming that the social housing will get used for that purpose, rather than being sold-on, it seems as if the council is the owner of c.€25-30m of ‘affordable’ property that it is presently unable to sell-on because its purchase/sale price is more than its present value. Clearly potential purchasers do not see the properties as either affordable or a sound investment given present market conditions. (more…)

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Gillian Tett, in her book on the global financial crisis entitled “Fool’s Gold”, points to the concept of a social silence (a concept outlined by French anthropologist/sociologist Pierre Bourdieu in his work Outline of a Theory in Practice) as a possible factor in facilitating and perpetuating the global credit boom that eventually burst with the collapse of Lehman Brothers in September 2008. Bourdieu’s social silence, as Tett explains, allows an elite group to control society not just by controlling the physical means of production but also by influencing the cultural discourse. Crucially, influencing the way society talks about itself also influences what is left unsaid – i.e. that which is regarded as impolite, taboo, boring, or taken for granted. Such silences can arise through overt strategies, but often come about less deliberately through social conformity or shared ideology and assumptions. According to Bourdieu, all that is required for the ideology to establish itself in this way is a complicit silence. Tett speculates that such a social silence may have been pivotal in the general acceptance of the idea that financial markets could regulate themselves. What is more, the opacity that surrounded seemingly sophisticated financial instruments, deterred non-specialists from gaining a fuller understanding of the workings of the financial markets and created a self-contained silo of financial activity and knowledge that only financial experts could penetrate.

To what extent could this idea of a social silence explain the perpetuation of the Irish property bubble and reckless banking practices of the late 1990s and early 2000s? After all, there does seem to be a general feeling of “we all saw it coming” yet only a handful of commentators warned of the dangers (and they were roundly dismissed as “talking down the economy”). Of course the social silence analogies don’t stop there: it could also be argued that, in the subsequent bust, the quality of debate over the Irish bank guarantee of October 2008, the implementation of NAMA, the capital injections into our ailing banks, whether or not to wind up Anglo Irish, and the risk of an Irish sovereign default has been anaemic at best, with only pockets of academics and media commentators really grappling with the details of these policies (in part, as illustrated by the difficulty in assessing the cost of winding up Anglo Irish bank, due to a lack of full information).

So, are we trapped in an Irish social silence? And if so, how do we turn up the volume?

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After much debate in recent months on the levels of housing vacancies and ghost estates across the country it now seems that an official inspection to document the true scale of the issue is underway.

Minister for State for Planning Ciaran Cuffe will tell planners at the Irish Planning Institute’s annual conference in Tullamore today that NAMA is to establish a committee to examine what should be done with “ghost” estate housing. A new initiative has also been set up within the Department of the Environment to document the condition of all housing estates across the country. According to Mr Cuffe this will include a detailed inventory of the overall number of housing developments, completed and occupied developments, units ready for sale, units near completion, units at specific earlier stages of construction, and units not started at all. It is hoped that this process will be completed by the end of the summer.

All going well, we will finally have a true picture of the level and state of the over-development throughout the country. This should then provide NAMA, the Department of the Environment, Local Authorities and all other interested housing bodies with an accurate evidence based platform from where a forward planning process can begin.

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Am I alone in feeling puzzled as to why revelations about the scale of our banking crisis seem to be followed so swiftly by outpourings of rancour towards the public service? (The chart shows how interest in the public sector, measured by number of web searches from Ireland, surged after the first anouncement of the bank guarantee scheme in September 2008, and again after the publication of the NAMA legislation in September 2009. The current surge, following the fallout from Minister Lenihan’s speech and the conclusion of talks on the proposed public sector agreement on March 30th is too recent to appear clearly on the chart). After all, there is no direct connection between the financial burden that the failings of bankers have imposed on the state on one hand, and the perceived failings of public servants on the other. There is, of course, a fiscal connection: the property bubble that fed reckless behaviour in the banking system also promoted (through its accompanying stamp duty receipts) the political fantasy that it was possible to increase spending on public services and reduce taxes at the same time. But it is unclear why this mismanagement of the economy should have resulted in such extraordinary levels of hostility to the public sector as a whole.

The argument in favour of urgently addressing the ‘structural deficit’ created by the collapse of the property market through dramatic cuts to public expenditure – even as the state makes almost unimaginably high financial commitments to the banking sector – appears to centre on the reaction of the notorious ‘bond markets’ which, we are told, will punish us if we don’t mutilate our society in this way. I am unqualified to comment on the merits of this argument – although Michael Taft has an amusing commentary on it over on progressive-economy. But even assuming that the argument is correct, and that we have no choice but to reduce our public services and lower the standard of living and working conditions of our public servants, why should the process be accompanied by such bile?

There are two kinds of explanations discernible in public discourse. One is that there has been a spontaneous upsurge of mass anger at the extravagant terms and conditions prevailing in an inefficient and ‘bloated’ public sector. But there are reasons to be more than a little suspicious about this. The hostility has come in surges marked by subtle but interesting changes in the terms of the debate – from a focus on the supposed ‘pay premium’ to one on the security of tenure enjoyed by (some) public servants and on our ‘gold-plated’ pensions. The argument about pay differentials appears to have lost some energy in the face of unarguably severe reductions in pay, and also, I suspect in the context of the reversals of pay cuts to senior civil servants, and of pay increases at NAMA and Anglo-Irish Bank. Furthermore, research showing that pay differentials between public and private employees were greatest at the lower end of the income scale must have increased the risk that people might begin to think unacceptably bad terms and conditions in segments of the private sector formed at least part of the problem. The current hyperbole surrounding job security and pensions will likely diminish in the face of similar ‘real world’ insights. It will dawn on us that not all employees in the public sector enjoy permanent positions. We will remember that security of tenure is indeed one of the reasons why, historically, so many Irish families encouraged their children (daughters in particular) to enter the public service – but that these are our relatives, friends and neighbours. And anyone who takes a deep breath and thinks calmly for a moment will realize that the absence of pensions in the private sector is the real pension problem faced by the country.

So what other explanation is there for the waves of public sector bashing? Members of the union leadership have suggested that anti-public sector hysteria has been cynically orchestrated. They have argued – as Jack O’Connor did on Monday’s ‘The Frontline’ – that the underlying motivation has been to reduce pay across the board, in the private as well as the public sector. A venerable strand of labour market theory in sociology suggests that employer groups are better able to foment divisions amongst employees when the workforce is ‘split’ across ascriptive social categories like race and ethnicity. So what, if anything, makes the public/private divide in Ireland so amenable to this kind of manipulation? The recent growth in public sector occupations has largely taken the form of an increase in professional female occupations. The numbers of people employed in public administration, education and health grew by about 180 thousand between 1998 and 2007, but fully 130 thousand of those people were women working in education and health. (The data are derived from Table 1.2 in a report by the ESRI to the Equality Authority. Women comprise the great majority of public sector employees (about 70 percent in 2007 if we treat those three sectors as a rough approximation; 64 per cent in 2006 according to an analysis of the National Employment Survey). Correspondingly, the public sector accounts for a substantial proportion of all female jobs (about a third in 2007). In this context, a comment reported from one of the recent teachers’ conferences – “We are not overpaid babysitters” – is telling. I believe that when the history of the present moment is written, the anger directed at the public sector will be understood as part of a wider pattern of social contention surrounding the transformation of social care and education from a vocation – associated mainly with religious organizations and with women whose primary role was perceived to be that of unpaid worker in the home – to a set of modern professional services.

There is more to it, of course. The cynical amongst us will think it rather convenient that the public should be so distracted when vast public resources are being transferred to zombie banks and ghost developments. And it must be acknowledged that some commentators are sincere in their belief that the private sector is always and everywhere superior to the public sector, even though their unwavering faith in this dogma seems extraordinary in the face of the global financial crisis. But it is no coincidence that, over the coming weeks, so much will depend on the votes of teachers and nurses.